ORDER
Saluja, J.M.
1. The department has filed this appeal against order of CIT(A) mainly on the ground of cancellation of penalty of Rs. 10,03,878 levied under section 271(1)(c) of Income-tax Act.
2. The brief facts are that the assessee-firm had filed return at Rs. 36,980. Asst. was completed on total income of Rs. 5,34,150. On first appeal, CIT(A) enhanced the assessed income to Rs. 19,67,636 and also directed Assessing Officer that penalty notice issued earlier would apply to concealed income worked out on the basis of enhanced income.
2.1 On first appeal, ld. counsel objected to levy of penalty after detection of alleged concealment of income by CIT(A). He referred to the decisions of Allahabad High Court in CIT v. Shadiram Balmukand [1972] 84 ITR 183 and CIT v. Dwarka Prasad Subhash Chandra [1974] 94 ITR 154. CIT(A)
observed that the ratio of the said decision was that penalties could only be levied by the authority which had initiated penalty proceedings. Even though penalty proceedings were initiated by Assessing Officer, enhancement was made by C1T(A) and penalty would have to be levied by him. Ld. counsel also made submissions on merits and pointed out that there was survey on the business premises on 1-11-1988, when three small bill books were found which, according to the department, contained sales of Rs. 4,60,455. The assessee had explained that most of the entries in these books related to hosiery items given to well-known persons for approval and which were sometimes returned. Whenever sales were effected, the same had been entered in regular sale bills issued. Total sales and g.p. shown at 15% compared favourably with earlier years. Assessing Officer had compared the expenditure under various heads during the year and observed that expenditure on dyeing and finishing charges and wages and fabrication charges had increased disproportionately. Assessing Officer arrived at the inference that the assessee had effected sales outside the books of account. He, therefore, estimated total sales at Rs. 30 lakhs and by applying g.p. rate of 15% arrived at total profit earned. CIT(A), on the other hand, inferred that entire sales effected outside the books represented total income and accordingly enhanced total income. Insofar as penalty proceedings were concerned, the assessee had given reasons for expenditure claimed in the year under consideration under two heads. He pointed out that the expenditure on raw material was proportionately lower during this year being 52.65% of total sales compared to 68.16%. He stressed that there could be no fabrication of finished goods without basic raw material and it would be unjust to presume that sales of Rs. 30 lakhs could take place on purchase of raw material of Rs. 6,44,322 only. He pointed out that variation in dyeing and finishing charges was because Rs. 62,119 on account of purchase of undyed yarn had wrongly been included under the said head, whereas the same should have been shown under raw material. During the year only undyed yarn was purchased as against purchases of dyed and undyed yarn, which resulted in greater expenses on dyeing and finishing yarn and lesser expenses on raw material. Regarding expenses on wages and fabrication, he submitted that outside labour charges had decreased from Rs. 39,835 to Rs. 10,330 because more work was done in house. He, therefore, urged that there was no reason to levy penalty under section 271 (1)(c). Ld. CIT (A) considered the submissions and found the explanation offered as acceptable. He observed that addition of Rs. 1,66,761 on account of difference in credit balance of various persons was not called for as in some cases addition had been deleted by CIT(A) and in other cases balances shown as per books of account were greater than those shown by the debtors. He referred to the case of Naurata Mechanical Works, where the assessee had shown Rs. 45,304 as due; whereas debtor had shown that no sum was due. Reg. debit balance standing in the name of Ankur, CIT(A) observed that balance had been correctly taken by Assessing Officer at Rs. 31,614, whereas it should have been Rs. 81,614 approximately as per balance-
sheet. He noted the arguments of ld. counsel that in respect of other balance also difference should have been added in assessment years to which they related and not in the year under consideration. CIT(A) held that in the first instance Assessing Officer had no jurisdiction to levy penalty, as per decisions of jurisdictional High Court relied upon by ld. counsel and secondly this was not a case where penalty under section 271(1)(c) could have been levied on merits, in view of the explanation -offered. Assessing Officer had not been able to prove that the explanation offered by the assessee was false or to state that there was any mala fide therein. He held that even on merits no penalty could be levied and ultimately deleted the impugned penalty.
3. Ld. D.R. relied heavily on the penalty order and submitted that sales reflected in the three bill books found during search were not shown in regular books of account. He referred to order dated 19-9-1995, whereby the Tribunal has upheld addition of Rs. 2,63,586 by observing that the entire sales including unaccounted sales had to be estimated on the basis of comparable manufacturing expenses and, therefore, sales worked out by Assessing Officer had to be upheld. The enhancement made by CIT(A) was quashed by the aforesaid order. He pointed out that the Tribunal have also considered addition of Rs. 1,65,761 on account of various discrepancies in accounts of certain parties and have held in paragraph 11 that….. . ‘It is correct that the assessee did make a surrender of income at Rs. 72,000 and that was duly shown by way of credit entry in the profit and loss account. Therefore, sum of Rs. 45,304 could not be included in total amount arrived at by Assessing Officer on account of variation’. Deduction shown at Rs. 30,000 in the case of Adi Nath Sales was also found to be incorrect. The Tribunal ultimately reduced the addition of Rs. 1,60,761 worked out by CIT(A) by amounts of Rs. 45,304 and Rs. 17,000 on account of difference in Adi Nath Sales. It held that balance deduction stood unexplained. He, therefore, urged that the impugned penalty should be sustained and Assessing Officer could be asked to recompute the same after excluding enhancement of income made by C1T(A).
3.1 Ld. counsel submitted that Assessing Officer could not levy penalty with reference to enhancement of income made by CIT(A), therefore, entire order of penalty was bad in law as it was not severable. He referred to the following decisions :–
(i) Shadiram Balmukand’s case (supra), wherein it was held that the authority imposing the penalty can do so only on being satisfied in the course of proceedings before it that a person has concealed the particulars of his income or furnished inaccurate particulars. As the amount of penalty was a single indivisible sum, it could not be related in any specific part to the concealed income concerning which the ITO had jurisdiction. It held that section 28(1)(c) of 1922 Act contemplates distinct jurisdiction in the ITO, the AAC and the Appellate Tribunal in relation to the proceedings pending before
those respective authorities so far as the imposition of penalty is concerned ;
(ii) Dwarka Prasad Subhash Chandra’s case (supra), wherein it was observed that nothing in the statute indicates that the IAC has any jurisdiction to impose penalty in a case where the AAC is satisfied in the course of proceedings before him that penalty proceedings should be taken ; and
(iii) IAC v. Prakash Wine Agency [ 1987] Taxation 86(4)-49 (Ahd.), in which IAC made asst. treating the assessee as registered firm and made additions and also initiated penalty proceedings. CIT(A) enhanced asst. and directed cancellation of registration. IAC imposed penalty treated the assessee as AOP, On the assessee’s appeal, the Tribunal deleted enhancement made by CIT(A) and cancelled the penalty, while the department’s appeal remained undisposed off. Misc. application filed by the dcptt. was rejected. On hearing departmental appeal, no fresh material was found and the view held earlier was confirmed by observing that the Tribunal had deleted the penally in view of certain High Court decisions, as the penalty had been levied in the status of AOP, whereas proceedings had been initiated against registered firm.
On merits, ld. counsel submitted that the explanation offered had not been accepted regarding loss of books of account. He pointed out that an affidavit was filed by the assessee and FIR also lodged. Non-acceptance of the explanation may be a good ground for making the addition hut may not be good for imposing penalty under section 271(1)(c). Entire asst. had been made on the basis of audited accounts. Assessing Officer had estimated sales on the basis of expenditure claimed during the year under consideration. He referred to page 18 of paper book and submitted that there were nine items of expenses and Assessing Officer had only picked out two items indicated in the last two columns. He submitted that with raw material purchases of only about Rs. 6.54 lakhs, sales of Rs. 30 lakhs were not possible. Ld. counsel submitted lhat there was another aspect inasmuch as there was no denial regarding shortage of stock. There was shortage of 2.35 lakhs and there could be two reasons that there were sales outside the books of account or the goods had been pilfered. In case sales were made outside the books, then the assessee could not maintain g.p. rate which was the same as in earlier year. He referred to explanation offered before CIT(A) at pages 13-16 of paper book and submitted that shortage was worked out on estimate basis. Sales shown to the Sales Tax authorities were higher and explanation in this behalf was furnished at page 20 of paper book. The department has not found that the explanation was incorrect. W.r.t. unaccounted sales as compared with entries in three bill books found during search, ld. counsel referred to explanation of the asscssee before C1T(A) at page 12 of paperbook and submitted that somehow the same did not find favour. W.r.t. addition of Rs. 1.65 lakhs,
he submitted that there was some difference in figures in respect of certain creditors/debtors. The Tribunal has also found that certain amounts were not correctly included in the aforesaid addition of Rs. 1.65 lakhs. He submitted that the order in quantum appeal does not bind the Tribunal in penalty proceedings under section 271(1)(c). In support. ld. counsel relied on the following decisions :–
I. CIT v. Balraj Sahani [1979] 119 ITR 36 (Bom.);
II. Add!. CIT v. Karachi Kampatwala [1981] 127 ITR 421 (All.);
III. Sunder LalMohinder Pal v. CIT[1982] 135 ITR 80 (Punj. & Har.);
IV. CIT v. Metal Products of India [1984] 150 ITR 714 (Punj. & Har.);
V. CIT v. P.K. Narayanan [1999] 238 ITR 905 (Ker.), wherein it has been observed that where additions to income sustained by appellate authorities, presumption of concealment can be rebutted and where the Tribunal found that explanation regarding additions was satisfactory, it was justified in deleting the penalty ; and
VI. Jaidayal Pyarelal v. CIT 1973 Tax LR 880 (All.), wherein it has been observed that in penally proceedings the assessee is not debarred from raising appropriate plea.
In view of the foregoing, ld. counsel urged that no interference is required in order of CIT(A) cancelling the impugned penalty.
4. We have carefully considered the rival submissions and have perused orders of tax authorities. We have also seen the case Saw relied upon by ld. counsel. It is observed from order dated 19-9-1995 in ITA No. 1091/90 for assessment year 1988-89 that while the Tribunal has upheld addition of Rs. 2,63,580 made on account of estimation of unaccounted sales w.r.t. manufacturing expenses, it quashed the enhancement in income made by CIT(A). It is further observed that while dealing with issue of addition of Rs. 1,65,761 on account of variation in accounts of certain parties, the Tribunal held that amounts of Rs. 45,304 and Rs. 17,000 were not inciudible in the said addition. Thus while addition of Rs. 2,63,560 has been confirmed w.r.t. estimation of unaccounted sales, the other addition of Rs. 1,65,761 has been substantially reduced. We feel that there is merit in the contentions of ld. counsel that Assessing Officer could not have imposed penalty for concealment w.r.t. enhancement of income made by CIT(A). The provisions of section 271(1) clearly specify that if Assessing Officer or C1T(A) in the course of any proceedings under this Act is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty, in addition to any tax payable by him, a sum which shall
not be less than, but which shall not exceed twice the amount of tax sought to be evaded by reason of concealment of particulars of his income or furnishing of inaccurate particulars of such income. Obviously CIT(A) could not have asked Assessing Officer to apply penalty notice issued earlier by him to concealed income worked out on the basis of enhanced income. We feel that this basic flaw in imposition of penalty would vitiate the entire penalty order. The decisions of Allahabad High Court in Shadiram Balmukand’s case (supra) and Dwarka Prasad Subhash Chandra’s case (supra) support the contention of ld. counsel in this behalf. We feel that even on merits the explanation furnished by the assessee, though not accepted while imposing penalty, has not been found to be false. As mentioned above, addition on account of unaccounted sales is based on estimation w.r.t. extra expenditure claimed and in case of addition made on account of discrepancies in certain accounts even the Tribunal has accepted a part of explanation furnished and have reduced the said addition substantially. Thus on facts and circumstances of the case, we feel that the penalty has been rightly deleted by CIT(A) and we see no reason to interfere with his order.
5. In the result, the appeal is dismissed.